Typically real estate agents will negotiate for the seller of a home to contribute up to 3% of the purchase price of the home towards the buyer’s closing costs. What many don’t know though is that this really is the minimum amount that can be contributed. This is especially important when purchasing a home under $150,000 because closing costs can many times exceed the 3% and the buyer will have to come to the closing table with money above their down payment.
The reason this happens is that there are both fixed and variable closing costs. Some fees are fixed regardless of the loan amount (such as underwriting, processing, tax fees, appraisal, etc.) and others are based on a percentage of the loan amount or purchase price (origination fee, points paid to buy down the rate, title insurance, property taxes, per diem interest, etc.). Those fixed costs represent a larger percentage of a smaller loan than they do a larger loan.
So to that end, here are the guidelines for allowable seller contributions toward closing costs:
- Primary residence
- 3% for LTV/CLTV > 90%
- 6% for LTV/CLTV > 75% to 89.99%
- 9% for LTV/CLTV < 74.99%
- Investment properties
- Seller can pay 100% of discount points and borrower’s non-recurring closing costs.
- Seller can provide an additional amount not to exceed 4% of the estimated reasonable value to assist the borrower’s payment of buydown points, prepaid expenses and funding fee.
Be sure your Realtor talks with your loan officer prior to putting an offer on a house. You want to make sure that enough seller concessions are negotiated to cover all your closing costs so that you don’t have to pay anything more than your down payment.